HEXO Corp (HEXO) loss in Q2 widens amid impairment charges

HEXO Corp.’s (TSX: HEXO; NYSE: HEXO) loss expanded in the second quarter of 2020, hurt by significant impairment charges. Hexo posted a loss of C$298 million compared to C$4 million in the second quarter of 2019. Net revenue rose 27% annually to C$17 million. HEXO stock declined more than 10% during the pre-market session.

On a per share basis, loss was C$1.13 compared to a loss of C$0.02 per share in the prior-year quarter. Impairment loss on inventory, right-use-assets, property, plant and equipment, intangible assets and goodwill in the recently ended quarter totaled c$266.3 million.

Market Environment

Cannabis industry experienced slower than expected retail store roll-outs in ‎Canada and delays in government approval for cannabis derivative products constrained distribution channels and adversely affected overall market sales and ‎profitability.

Outlook

Hexo expects to be adjusted EBITDA positive in the first half of fiscal 2021. Adjusted EBITDA in the second quarter of 2020 was a loss of C$10.3 million.

Subsequent to Q2

It’s worth noting that two weeks back, Hexo reported that it couldn’t file the interim statements as well as management discussion and analysis for the three months ended January 31, 2020 period. However, the company released certain financial results for Q2 and added that it will have a significant impairment loss in Q2 2020. At that time, Hexo projected that the impairment loss to be in the range of C$265 million to C$280 million. After this announcement, HEXO stock plunged to a new yearly low ($0.35).

Early March, the company completed a strategic review of its cultivation assets. Hexo is not planning to restart its Niagara facility operations and planned to sell this facility.

COVID-19 Update

Last week, Hexo announced that its operations in Ontario and Quebec since the medical cannabis sector is considered as an essential service. The company added that it is monitoring the current situation related to the Coronavirus outbreak and its impact on the business. To fulfill the orders, the company’s production and manufacturing facilities will operate as usual with additional safety measures.

“The industry continues to see challenges ahead, and following a strategic review of the company’s core and non-core assets we believe we have positioned HEXO to meet these challenges head on,” said CEO Sebastien St-Louis.